ABN AMRO: reducing risk in investment portfolios

ABN AMRO has taken a little more risk off the table in its investment portfolios, by slightly reducing its exposure to riskier bonds and shifting the proceeds to high-quality bonds. In terms of asset allocation, the bank remains underweight in bonds and shares, with a preference for cash.

Richard de Groot, Chair of the ABN AMRO Investment Committee, said: “This shift is primarily aimed at positioning our bond portfolios for any preventive action by central banks to support the global economy. The changes should not therefore be viewed as fear of a global recession, as that’s not our baseline scenario. More specifically, we’d suggest that investors scale back their exposures to riskier bonds, such as those in emerging markets (EMD). The proceeds could be used to invest in less risky bond segments that still generate decent risk premiums at modest credit risks. Government-related bonds, for example those of the European Investment Bank, fall into this category, as do the covered bonds and government bonds of semi-core eurozone countries, such as Spain, France and Ireland.”

Improved protection through ECB action

ABN AMRO also suggests selling US mortgage-backed securities (MBS), as these are exposed to growing credit risks as well as risks related to the end of the credit cycle in the US. The proceeds could be invested in European corporate bonds. With the ECB expected to take monetary action, any restart of the asset purchasing programme will support European investment-grade corporate credits and core (and semi-core) eurozone government bonds. Reducing the allocation to emerging market bonds also protects portfolios from further weakness in China and other emerging markets, which rely heavily on global trade.

Challenging equity market fundamentals

ABN AMRO reckons that equity market fundamentals will remain challenging. The bank feels it is hard to gauge how the economy will develop, even if no global recession is predicted for either this year or next. What’s more, corporate earnings have strongly deteriorated (despite major regional differences). ABN AMRO does not see the economy re-accelerate going forward and the underweight equity positioning was therefore left unchanged. In terms of regions, the US continues to be preferred (overweight), while the European market is out of favour (underweight) with a neutral stance taken towards emerging markets.

Possible correction based on ‘reality check’

De Groot observed: “Equity markets are experiencing a ‘reality check,’ with the question being whether the Fed’s rate cuts are mid-cycle adjustments or signalling the end of the business cycle. We still do not expect a bear market as might occur when a recession happens. Instead, we expect a correction based on the market’s reality check.”